Modern Principles of Economics Chapter 30 PDF

MODERN PRINCIPLES OF ECONOMICS Sixth Edition Chapter 30 Unemployment and Labor Force...

MODERN PRINCIPLES OF ECONOMICS Sixth Edition Chapter 30 Unemployment and Labor Force Participation AI generated image provided by Alex Tabarrok © 2024 Worth Publishers. All Rights Reserved.  Outline Defining Unemployment Frictional Unemployment Structural Unemployment Cyclical Unemployment Labor Force Participation Takeaway © 2024 Worth Publishers. All Rights Reserved.  Introduction (1 of 2) Some unemployment is a necessary consequence of economic growth. Employment in fields such as farming has declined, while other jobs such as blacksmiths and darkroom technicians have disappeared. New jobs have been created in areas like software engineering and the biosciences. There are different types of unemployment with different causes. © 2024 Worth Publishers. All Rights Reserved.  Introduction (2 of 2) Employment, unemployment, and labor force participation in the U.S. population © 2024 Worth Publishers. All Rights Reserved.  Definition (1 of 11) Unemployed workers: Adults who do not have a job, but who are looking for work. Unemployment rate: The percentage of the labor force without a job. © 2024 Worth Publishers. All Rights Reserved.  Defining Unemployment (1 of 4) Someone is unemployed only if they are willing and able to work but cannot find a job. To be counted as unemployed, a person must meet these criteria: – 16 years or older – Not institutionalized (e.g., not in prison) – A civilian – Looking for work © 2024 Worth Publishers. All Rights Reserved. Defining Unemployment (2 of 4) © 2024 Worth Publishers. All Rights Reserved.  Defining Unemployment (3 of 4) In November 2022, 6.0 million people were unemployed in the United States and 158.5 million were employed. Together, the employed and the unemployed make up the labor force of 164.5 million. The unemployment rate was: Unemployed Unemployed Unemployment rate  % = = ×100 Unemployed + Employed Labor Force 6.0 million 6 Unemployment rate  % = = ×100 = 3.6% 6.0 million +158.5 million 164.5 © 2024 Worth Publishers. All Rights Reserved.  Self-Check (1 of 6) If 2 million people are unemployed and 8 million are employed, the unemployment rate is: a. 2%. b. 20%. c. 25%. © 2024 Worth Publishers. All Rights Reserved.  Self-Check (1 of 6) (Answer) If 2 million people are unemployed and 8 million are employed, the unemployment rate is: a. 2%. b. 20%. c. 25%. Answer: b. The unemployment rate is [2 / (2 + 8)] × 100 = 20%. © 2024 Worth Publishers. All Rights Reserved.  Definition (2 of 11) Labor force participation rate: The percentage of adults in the labor force. © 2024 Worth Publishers. All Rights Reserved.  Defining Unemployment (4 of 4) Unemployment, especially if it is long term, can be financially and psychologically devastating. Unemployment also means that the economy is underperforming. The unemployment rate is the single best indicator of how well the labor market is working, but it is an incomplete indicator. – It does not include discouraged or underemployed workers. © 2024 Worth Publishers. All Rights Reserved.  Definition (3 of 11) Discouraged workers: Workers who have given up looking for work but who would still like a job. © 2024 Worth Publishers. All Rights Reserved.  Discouraged Workers (1 of 2) Discouraged workers are difficult to measure because the concept is not well defined. One definition is workers who want and are available for work, and who have looked for a job sometime in the last year but not in the last month because they believe that no jobs were available for them. Using this definition, the number of discouraged workers is small relative to the number of unemployed workers. © 2024 Worth Publishers. All Rights Reserved. Discouraged Workers (2 of 2) © 2024 Worth Publishers. All Rights Reserved.  Definition (4 of 11) Underemployment rate: A Bureau of Labor Statistics measure that includes part- time workers who would rather have a full-time position and people who would like to work but have given up looking for a job. © 2024 Worth Publishers. All Rights Reserved.  Underemployment The unemployment rate also doesn't measure the quality of the jobs or how well workers are matched to their jobs. A taxi driver with a PhD in chemistry is counted as fully employed; so is a part-time worker. Defining and measuring partial employment is difficult. As of November 2022, the underemployment rate in the United States was 6.7%. © 2024 Worth Publishers. All Rights Reserved.  Self-Check (2 of 6) If you have a PhD in physics and are working as a retail clerk, you are: a. unemployed. b. partially employed. c. underemployed. © 2024 Worth Publishers. All Rights Reserved.  Self-Check (2 of 6) (Answer) If you have a PhD in physics and are working as a retail clerk, you are: a. unemployed. b. partially employed. c. underemployed. Answer: c. You are underemployed if you have a PhD in physics and are working as a retail clerk. © 2024 Worth Publishers. All Rights Reserved.  Definition (5 of 11) Frictional unemployment: Short-term unemployment caused by the ordinary difficulties of matching employee to employer. © 2024 Worth Publishers. All Rights Reserved.  Frictional Unemployment (1 of 2) Finding a job that you want at a wage that you will accept and that the employer will pay takes time. – This leads to frictional unemployment. Scarcity of information is one of the causes of frictional unemployment. One of the most worrying aspects of the 2007–2009 recession was the increase in long-term unemployment. © 2024 Worth Publishers. All Rights Reserved. Duration Of Unemployment © 2024 Worth Publishers. All Rights Reserved.  Frictional Unemployment (2 of 2) Frictional unemployment is typically a large share of total unemployment because the U.S. economy is dynamic. Innovation and competition drive progress, which creates new jobs and destroys old jobs: "creative destruction." In July 2021, 6.5 million new jobs were created, but there were also 5.8 million job separations, for a total of 700,000 new jobs. © 2024 Worth Publishers. All Rights Reserved.  Definition (6 of 11) Structural unemployment: Persistent, long-term unemployment caused by long- lasting shocks or permanent features of an economy that make it more difficult for some workers to find jobs. © 2024 Worth Publishers. All Rights Reserved.  Structural Unemployment (1 of 4) One cause of structural unemployment is large, economy-wide shocks such as oil shocks. Other causes include restructuring as a result of globalization, new information technologies, and the shift from a manufacturing to a service economy. Structural unemployment has significant costs: – Loss of economic output – The unemployed suffer higher levels of stress, higher rates of suicide, and lower rates of measured happiness. © 2024 Worth Publishers. All Rights Reserved.  Structural Unemployment (2 of 4) Structural unemployment has been a more serious problem in Europe than in the United States because of labor regulations. Unemployment benefits, minimum wages, unions, and employment protection laws benefit workers. All of these regulations are more generous and wide- ranging in Europe. But the regulations can increase unemployment rates. © 2024 Worth Publishers. All Rights Reserved.  Self-Check (3 of 6) One cause of structural unemployment is: a. a recession. b. a large, economy-wide shock. c. the time it takes to find a suitable job. © 2024 Worth Publishers. All Rights Reserved.  Self-Check (3 of 6) (Answer) One cause of structural unemployment is: a. a recession. b. a large, economy-wide shock. c. the time it takes to find a suitable job. Answer: b. One cause of structural unemployment is a large, economy-wide shock. © 2024 Worth Publishers. All Rights Reserved.  Unemployment Benefits Unemployment benefits are the most obvious labor regulation that can increase unemployment rates. Unemployment benefits include unemployment insurance, but also other benefits such as housing assistance in some countries. In France, the first year of unemployment, 80% of the worker's income is replaced. In comparison, in the United States, only 38% of a worker's pay is replaced. Unemployment benefits also last much longer in Europe than in the United States. © 2024 Worth Publishers. All Rights Reserved.  Minimum Wage (1 of 2) Both minimum wages and median wages have been higher in Western Europe than in the United States. This means that the minimum wage will affect more workers and create more unemployment in Europe than in the United States. The minimum wage is also more likely to create unemployment among young workers. In 2021, in France, 18.2% of workers younger than the age of 25 were unemployed, while in the United States, 8.2% of these workers were unemployed. © 2024 Worth Publishers. All Rights Reserved. Minimum Wage (2 of 2) © 2024 Worth Publishers. All Rights Reserved.  Definition (7 of 11) Union: An association of workers that bargains collectively with employers over wages, benefits, and working conditions. © 2024 Worth Publishers. All Rights Reserved.  Unions Unions can provide value for workers and employers alike. Excessively strong unions have an effect similar to minimum wages. Unions are more powerful in Europe than in the United States. © 2024 Worth Publishers. All Rights Reserved.  Definition (8 of 11) Employment at-will doctrine: An employee may quit and an employer may fire an employee at any time and for any reason. There are many exceptions to the at-will doctrine, but it is the most basic U.S. employment law. © 2024 Worth Publishers. All Rights Reserved.  Employment Protection Laws (1 of 2) Employment protection laws have the following effects: – Create valuable insurance for workers with full-time jobs – Make labor markets less flexible and dynamic – Increase the duration of unemployment – Increase unemployment rates among young, minority, or otherwise "riskier" workers © 2024 Worth Publishers. All Rights Reserved.  Employment Protection Laws (2 of 2) Hiring and firing costs increase long-term unemployment. © 2024 Worth Publishers. All Rights Reserved.  Self-Check (4 of 6) The employment at-will doctrine says that employment can be terminated: a. at any time for any reason. b. with two weeks' notice. c. at any time by employees, but employers must give notice. © 2024 Worth Publishers. All Rights Reserved.  Self-Check (4 of 6) (Answer) The employment at-will doctrine says that employment can be terminated: a. at any time for any reason. b. with two weeks' notice. c. at any time by employees, but employers must give notice. Answer: a. The employment at-will doctrine says that employment can be terminated by either the employer or the employee, at any time and for any reason. © 2024 Worth Publishers. All Rights Reserved.  Definition (9 of 11) Active labor market policies: Policies such as work tests, job search assistance, and job retraining programs that focus on getting unemployed workers back to work. © 2024 Worth Publishers. All Rights Reserved.  Structural Unemployment (3 of 4) Factors that can increase structural unemployment: Large, long-lasting shocks that require the economy to restructure – Oil shocks, shifts from manufacturing to services, globalization, and technology shocks Labor regulations – Unemployment benefits, minimum wages, powerful unions, and employment protection laws © 2024 Worth Publishers. All Rights Reserved.  Structural Unemployment (4 of 4) Factors that can reduce structural unemployment: Active labor market policies – Job retraining, job-search assistance, work tests, and early employment bonuses © 2024 Worth Publishers. All Rights Reserved.  Definition (10 of 11) Cyclical unemployment: Unemployment correlated with the business cycle. © 2024 Worth Publishers. All Rights Reserved. Cyclical Unemployment (1 of 3) © 2024 Worth Publishers. All Rights Reserved.  Cyclical Unemployment (2 of 3) Unemployment increases dramatically during a recession for two reasons: 1. When GDP is falling, firms often lay off workers, which increases unemployment. 2. Idle labor and idle capital hurt the economy's ability to create more jobs. Keynesian economists think that cyclical unemployment is caused by deficiencies in aggregate demand. © 2024 Worth Publishers. All Rights Reserved.  Cyclical Unemployment (3 of 3) Faster growth in real GDP decreases unemployment. © 2024 Worth Publishers. All Rights Reserved.  Self-Check (5 of 6) Cyclical unemployment is correlated with: a. innovation. b. the business cycle. c. economic shocks. © 2024 Worth Publishers. All Rights Reserved.  Self-Check (5 of 6) (Answer) Cyclical unemployment is correlated with: a. innovation. b. the business cycle. c. economic shocks. Answer: b. Cyclical unemployment is correlated with the business cycle. © 2024 Worth Publishers. All Rights Reserved.  Definition (11 of 11) Natural unemployment rate: The rate of structural plus frictional unemployment. © 2024 Worth Publishers. All Rights Reserved.  Natural Unemployment Rate (1 of 3) The underlying rates of frictional and structural unemployment change only slowly through time as major, long-lasting features of the economy change. Cyclical unemployment can increase or decrease dramatically over a matter of months. The natural rate changes only slowly through time, and the actual rate of unemployment varies around the natural rate. © 2024 Worth Publishers. All Rights Reserved. Natural Unemployment Rate (2 of 3) © 2024 Worth Publishers. All Rights Reserved.  Labor Force Participation The labor force participation rate (LFPR) is the percentage of the adult, noninstitutionalized, civilian population who are working or actively looking for work. Unemployed + Employed Labor force LFPR = = ×100 Adult population Adult population In 2022, the labor force participation rate was: 164.4 million LFPR = ×100 = 62.1% 264.7 million © 2024 Worth Publishers. All Rights Reserved.  Lifecycle Effects and Demographics Labor force participation is affected by lifecycle effects and demographics. Age Range (years) Labor Force Participation Rate 16–19 34% 25–54 80.9% 65+ 18.6% © 2024 Worth Publishers. All Rights Reserved.  Natural Unemployment Rate (3 of 3) Taxes discourage work, while benefits encourage nonwork. Labor force participation is also affected by incentives. © 2024 Worth Publishers. All Rights Reserved.  Self-Check (6 of 6) Labor force participation is affected by: a. the unemployment rate. b. lifecycle effects and demographics. c. the business cycle. © 2024 Worth Publishers. All Rights Reserved.  Self-Check (6 of 6) (Answer) Labor force participation is affected by: a. the unemployment rate. b. lifecycle effects and demographics. c. the business cycle. Answer: b. Labor force participation is affected by lifecycle effects and demographics. © 2024 Worth Publishers. All Rights Reserved.  Takeaway You should know how unemployment, the unemployment rate, and the labor force participation rate are defined and calculated. You should also be able to define frictional, structural, and cyclical unemployment. You should know about the factors that increase or decrease the labor force participation rate. © 2024 Worth Publishers. All Rights Reserved.